India’s economic growth story in the past few years has been that of an over-promised and under-delivered one. Despite structural reforms, the estimated 8-9 per cent growth potential is losing its purchase considering the looming challenges. The Nikkei Services PMI gauge printed at 51.7 in January, indicating the sector is breathing, but needs its pulse checked as the expansion is below the long-run average. Manufacturing is picking up, but is yet to break into a run. Rising crude prices and inflation are forever in the background ready to strike at a moment’s notice. Much was expected from the recent Budget, but it failed to kick-start the virtuous investment cycle.
Instead, Finance Minister Arun Jaitley resorted to basic accounting principles, i.e. keeping expenditure low and revenue target modest at 13.6 per cent and 16.7 per cent respectively. Hypothetically, if expenditure remains intact and revenue overshoots the target, it might reduce fiscal deficit to 3 per cent of GDP a year ahead of the stated goal of FY21. For now, rating agencies aren’t grudging the deficit breach of 30 bps this fiscal, though the move spooked bond markets. The longer it gyrates, the deeper the treasury losses will be for banks. The short-term challenge and the onus thus is on the RBI to intervene and contain the widening gap between policy and market rates.
Currently, interest payments are the largest component of all revenue expenditure at 35.3 per cent, and hence it’s essential to rein in debt and deficit in order to utilise capital for productive purposes. But the Budget accounts for only a little over half of the deficit, with the rest undertaken at state level. Considering the state 7th pay commission, redemption of Uday bonds and farm loan waivers, chances of fiscal slippage by states can’t be ruled out and needs attention. For growth uptick, tackling joblessness by one million jobs a month is the centrepiece policy priority. In order to do so, Jaitley simply has to JAM— just about manage—the economy doing whatever it takes.